NY futures closed a very volatile week about unchanged, as July added just 6 points to close at 79.24 cents.

The market went on a wild ride this week, as July rocketed to a ‘synthetic’ high of 88.40 cents on Monday before running out of fuel and crashing back down. It was truly remarkable to see the market rally more than 12 cents during three sessions from last Thursday to Monday, only to collapse by 9 cents over the following three sessions.

Things started to heat up last Friday when July broke above resistance and posted new contract highs, which in turn brought in some new spec buying, while trade shorts were forced to play defense by buying call options. The unwinding of short July/long Dec bets also contributed to the blow off in July, as the inversion grew from about 400 to 1400 points before coming back down in again.

Monday’s session saw a record volume changing hands, as 109,452 futures and 37,053 options were traded. This was only the second time that more than 100,000 futures were traded, with the previous record dating back to November 11, 2010. Despite July being locked the limit on three occasions this week, traders were always able to trade it via the July/Dec spread. This prevented greater panic since traders never felt trapped, a feeling that often feeds these parabolic moves.

When the spot futures month was trading in the high 80s it had become the highest bidder for US cotton around the globe, by a wide margin! This prompted merchants to buy back cotton from buyers in the Far East with the intention to potentially deliver it against the board at a higher net price. We heard of several hundred thousand bales of this ‘arbitrage’ being done, which was enough to cap the market.

Now that the market has fallen back to reality, or at least closer to it, merchants may simply buy back their short futures and then sell the cotton again in the export market. From what we hear there are still a lot of mills with 3rd quarter requirements and merchants are keen not to carry any cotton over the summer. In other words there is an incentive for both sides to keep sales going, but the price needs to be workable!

We feel that the cash value of the certified stock is around 75 to 76 cents, which means that July is still a bit overpriced. However, as we have learned there are other factors impacting the futures market as well, such as the behavior of speculators and/or mills still having to fix over 4 million bales on July.

Speculators probably don’t feel too good right now, because they missed a great opportunity to cash in. A still elevated open interest tells us that only a few of them took advantage of it. At this point the primary uptrend is still in force, with the 15-month uptrend line currently running through around 7650 cents.

Most speculators will probably hang on to their longs as long as the primary trend compels them to. We had a similar situation last August, when the market dropped by around 11 cents in a matter of weeks and speculators stayed in the game. However, if the market were to break this long-term uptrend we would likely see a major exodus of spec longs and a quick drop into the low 70s. The odds for this to happen anytime soon are not great, since the market would first need to chew through a lot of trade buying from fixations and short covering.

Today’s CFTC on-call report showed that mills haven’t made much progress with their fixations last week, as July still had 4.13 million in unfixed sales, which was down only 0.50 million from the week before. Since prices were rallying we doubt that mills have fixed much since then.

Unfixed on-call sales on December and later months continued to rise by over 400,000 bales and amount to almost 7.1 million bales, which will act in support of December and March going forward.

US export sales remained strong last week at a combined 297,700 running bales of Upland and Pima cotton for both marketing years, despite cancellations of 61,700 running bales. Total commitments have now reached 14.7 million statistical bales, of which 10.4 million bales have so far been exported. Sales for August onward shipments are already at 2.75 million statistical bales.

The next report will probably show a negative sales number, since there were more commitments bought back and cancelled than new ones made in this rising market! However, this will be a one-time event and the US is still on course of selling out this season!

So where do we go from here? Now that we got the squeeze play out of the way, both the market’s psychology and momentum have turned negative. Fundamentally the market is still too high and specs can’t be happy with their current book. The market may therefore continue to go lower in order to find trade support, both from new business and fixations. We expect that level to be at around 7650-7700, maybe a shade above it.

If the market trades low enough for the certified stock to get sold, then it may have another shot at the upside, but for now it is the specs that are sweating it!

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